June 19, 2015 - Urbanomics
By most conventional measures, the labor market in the United States has now moved from recovery to expansion, recapturing the full tally of jobs lost during the downturn and surpassing the peak in employment reached just before the onset of the financial crisis. Yet several qualifiers remain. It has taken longer than during any previous modern recovery to recoup the losses from the downturn, which may forewarn of structural challenges in the labor market that will influence the shape of future cycles. Among the persistent challenges, the jobs created over the last several years are not in every case on par with the jobs lost; reflecting continued slack in the labor force as well as the employment mix, wages have stagnated for a large share of American workers.
For the short and medium term, the employment outlook is generally improving. Employers added nearly 3.4 million jobs in 2014, the best result since 1997, and are on track for a comparable result this year. Following a lull in March 2015, payrolls expanded by 221,000 jobs in April and by 280,000 jobs in May. The unemployment rate, an admittedly incomplete measure of labor market health, has fallen to 5.5 percent as of the Bureau of Labor Statistics’ most recent reporting, within striking distance of economists’ estimates of the non-accelerating inflation rate of unemployment (NAIRU). Below this level, inflation would likely rise above its target range, prompting higher short-term interest rates in a conventional monetary policy regime.
The favorable trends are consistent with a more robust outlook for hiring. As of April, the tally of job openings had increased to 5.4 million, rising more than 20 percent from a year earlier to surpass the previous recorded high from the dot-com era. The drags on the labor market are nonetheless apparent. One particular feature of the data that has garnered attention is an observable “loop” in the Beveridge curve, which measures the relationship between openings and unemployment. The count of job openings (and gross hiring) in the United States has improved dramatically; unemployment remains relatively high in comparison.
The shift in the relationship between job openings and unemployment indicates that businesses’ intentions to hire are not translating into labor market outcomes as predictably as in the past. The question of why the Beveridge curve has shifted is open for reasoned debate. Survey evidence from the National Federation of Independent Business suggests that small-business owners are encountering a skills mismatch between their needs and people available for work.
It bears noting that some of the economics professions’ most notable thinkers question whether this metric tells us anything useful. Looking as far back as 1950, Peter Diamond and Ayşegül Şahin offer the following in a New York Fed staff report1:
Outward shifts in the Beveridge curve have been common occurrences during U.S. recoveries. By itself, the presence of a shift has not been a good predictor of whether the unemployment rate at the end of the expansion following a shift was higher or lower than that in the preceding expansion.
Princeton economists Alan Krueger, Judd Cramer, and David Cho elaborate on the question in terms of the link to long-term unemployment:
… the tendency of the labor force withdrawal rate of the long-term unemployed to decline in a recession and then rise in a recovery plays an important role in the well-documented loop around the Beveridge curve2
A key implication of their work is persistence in long-term unemployment. Given the unusually large number of long-term unemployed in the aftermath of the Great Recession, policies directed at addressing their disengagement from the labor market may be an important component of any holistic approach to improving overall market health.
2 www.brookings.edu/~/media/Projects/BPEA/Spring 2014/2014a_Krueger.pdf
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